Market Place; Transports Signal Need for Caution

By Floyd Norris

Published: July 19, 1989

TRANSPORT stocks are soaring ever upward, or at least one might get that impression by glancing at the most widely watched barometer of the group, the Dow Jones transportation average. Yesterday, the index rose 2.75, to 1,232.05, a record and 12 percent above its 1987 peak.

But a closer look shows a divided, even troubled, market in the transports. The stars are the airline stocks, benefiting from consolidations that have pushed up fares and from rampant takeover speculation. But the other two principal sectors of the Dow transports - rails and trucks - tell a different story.

Rail stocks have advanced since spring, although generally without enthusiasm. Trucking company shares have nearly halted.

A big part of the problem for the rail and trucking companies is simply that business has fallen off. Unlike the airlines, which focus on moving people, the other carriers carry products and are acutely sensitive to the slowing of the economy.

''Rail traffic has been pretty soft now for several months,'' said Graeme Anne Lidgerwood, the First Boston railroad analyst. ''The million-dollar question right now is how bad it is going to get.''

In June, it got worse. ''We saw a significant slowing in the economy, as reflected in rail traffic,'' said Michael Lloyd, an analyst at Salomon Brothers.

Rail carloadings showed significant declines in June in almost every category, relative to the previous year. Some of those problems can be attributed to temporary factors, like coal strikes, but others cannot. Lumber shipments by rail fell 8 percent, paper and pulp were down 4.8 percent, metals 5.3 percent and motor vehicles 5.6 percent.

Chemicals, an industry that had been running well for most of the year, produced June shipments at about the same level as last year but down 8.6 percent from May.

Rail stocks may be getting cheap, at least relative to other stocks, if the economy really is headed for the widely expected soft landing, which should produce one or two more quarters of poor traffic and then a gradual rebound, Mrs. Lidgerwood said. A real recession, on the other hand, would be much worse.

The rail problems were emphasized yesterday when Santa Fe Pacific, the operator of the Santa Fe railroad, announced plans to cut management and clerical personnel to save cash. Santa Fe, which fell 25 cents, to $21.50, yesterday, has the dubious distinction of being the worst performing of the six rails in the Dow transports since the spring market correction ended on March 23, with the Dow transports at 1,008.09.

Santa Fe, which has risen just 1.2 percent since then, has seen grain shipments fall off sharply, at a time when it faces high levels of debt from a previous restructuring and a $1 billion antitrust judgment stemming from a suit brought by the would-be builders of a coal-slurry pipeline. The company is appealing that award.

The rail stocks that have done relatively well have been those deemed to be candidates for restructuring. Mrs. Lidgerwood likes Norfolk Southern, up 8.7 percent since March 23, because it has little leverage and could sharply increase its share buyback program, as well as CSX, up 7.6 percent, which is trying to cut employment levels and reduce its trackage. ''From a valuation standpoint, it is pretty attractive,'' she said. ''But you have to be willing to overlook the near-term valley'' of poor results. Mr. Lloyd likes Norfolk Southern and Union Pacific, which is involved in a strategic restructuring and is the railroad star since the bottom, having risen 12.7 percent.

Since the March 23 low, the Dow transports have risen 22.2 percent, far more than the other major indexes. The Dow industrials have advanced 13.5 percent over the same period. In the transport index just two stocks, UAL and NWA, account for 71 percent of the increase, and the airline stocks as a group make up 96 percent of the gain. The other transports have done little.

The Dow Theory, a traditional method of stock market analysis, got started as a way of checking the health of the economy. The theory, as developed late in the 19th century by Charles Dow - the Dow in Dow Jones - was that in times of economic health, both the companies that make the goods, the industrials, and the ones that move them, the transports, should be doing well, as reflected in the stock market.

While both Dow averages have been doing well this summer, the internal split in the transports may be cause for concern. The companies that move the goods are not performing well, either in the stock market or at the loading dock. But those who follow the Dow transports as a sign of market sentiment may be missing that message, as the tide of airline speculation obscures the reality of lackluster traffic on the ground.